Hong Kong Property: A Few Observations On Grade A Office Yields

Since the first round of quantitative easing, yields have been compressed across various real estate types in Hong Kong, from residential to commercial properties. Yield compression certainly drove real estate prices higher in Hong Kong across all property types.

Source: Rating and Valuation Department

A closer look at the Grade A Office yields gives us the following chart, which plots the spread between yield (cap rate, whatever you like to call) and the US 10-year Treasury Yield (a proxy for risk-free rate).

Source: Rating and Valuation Department, St. Louis Fed

Red line showing the average spread

A even closer look in the spreads since 2004, the spreads have actually been negative for most of the time.

Source: Rating and Valuation Department, St. Louis Fed

Green line showing the average spread

Either investors view Grade A Office as an investment as safe as US Treasury, or they are attracted to the growth potential of rents and/or capital values, otherwise it does not make sense to accept this kind of yield. In fact, as the treasury yield rose after the announcement of the second round of quantitative easing a.k.a. QE2, the spread between Hong Kong Office Yield and 10-Year US Treasury has dropped to negative.

At record low interest rates which can hardly go much lower, any yield compression has to be driven by a higher growth expectation and/or lower perceived risk.